SAN FRANCISCO (07/20/2000) - Having offered US$12 trades since January 1997, TD Waterhouse Group Inc. is expected to announce within a week that it will increase fees for some of its trades to $15. Effective Sept. 1, the higher commission will apply to limit orders for its U.S. brokerage operations. Fees for market orders and all international trades will remain unchanged.
A spokesman for New York-based TD Waterhouse confirmed the fee increase but declined to discuss the reasons for it.
This fee increase comes at a time when the average commission in the industry is declining. In recent months, brokerages such as Ameritrade's Freetrade.com and TheFinancialCafe.com have launched free trade-market orders. Similarly, Charles Schwab & Co., Fidelity and E-Trade have all reduced fees for their most active customers. None of the major brokerage houses has raised fees for online trades in several years.
"This may be a precursor to [TD Waterhouse] lowering commissions for their active traders," says Chase H&Q analyst Greg Smith. "They must think they can pick up more revenue without hurting their customers. It does seem a little unusual."
In charging higher fees for limit orders than for market orders, TD Waterhouse will join most of its competitors. Brokerages receive a payment for each market order, which is a trade at the market's current price. The trades are routed to market-making firms, which pay for the order flow.
Limit orders, which are trades requested at a specified price, are not profitable for the traders. As a result, the brokerages receive no payment for such orders. E-Trade charges $4 more for limit orders, and Ameritrade charges an extra $5. The logic is that customers will find the lower prices for market orders more attractive and will make more of those orders and that this will translate into increased income for the brokerage.
Datek Online, which charges $9.99 for both market and limit orders, is the only brokerage that has gone so far as to reimburse its customers for all of the payment it receives for market order flow.
Online brokerages in general have suffered during recent months as trading volume in the overall market has declined. E-Trade announced Wednesday that its trading volume fell 26 percent from first-quarter levels and that its revenue dropped 19 percent as a result. TD Waterhouse, whose quarter ends in July instead of June, could report a trading volume even more depressed than those of its competitors, given that its financials will not include the high activity of April.
Smith says observers should not attribute the fee increase to recent market sluggishness. "This is probably a move they would have done regardless of the market," he says.
But the CEO of DLJdirect (DIR) , an online brokerage that targets clients with higher net worth than most of its competitors, acknowledges that price points continue to come up for discussion, particularly during slower markets.
"We constantly have to re-evaluate price points," says DLJdirect chief Blake Darcy. "We don't have any changes in the works right now, but we haven't changed our prices since 1997. It's possible we might make some adjustments."